[animalwithin]

I have the following answer explanation from Ninja that I need clarification on:

“The issuer pays the holder the face amount at maturity, but has no interest payments until its maturity. The issuer and purchaser must recognize interest expense and income, respectively, throughout the bond term.”

How do we have no interest payments yet still recognize interest expense?

[thisismyname]

Zero coupon bonds are always sold at a discount, otherwise it makes no economic sense for the investor to purchase it. So the difference between the face value and the discounted amount serves as the “interest”.

For example, a $1,000 face value zero coupon bond is sold for $900. At issuance the you would DR cash and CR bonds payable for 900. At the end of the year, assuming market interest rates are at 10%, you would DR interest expense and CR bonds payable for 90 ($900 x 10%). As you can see, over the life of the bond you will simultaneously recognize interest expense and bring the bonds payable amount back up to its full face value.

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